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Compound Interest
Compound Interest
Compound Interest
INTEREST
Engr. Anthony T. Reyes
COMPOUND INTEREST
𝑛 −𝑛
𝐹 =𝑃 1+𝑖 𝑃 =𝐹 1+𝑖
Nominal Rate (r): Mode of m
Compounding
𝑟 Annually 1
𝑖= Semi-Annually 2
𝑚 Quarterly 4
𝑖 = 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑒𝑟 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑒𝑟𝑖𝑜𝑑 Bi-Monthly 6
𝑟 = 𝑛𝑜𝑚𝑖𝑛𝑎𝑙 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 Monthly 12
Semi-Monthly 24
𝑚 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
Daily 360
𝑚
Effective Rate (r): 𝐸𝑅 = 1 + 𝑖 −1
𝐹 = 𝑃𝑒 𝑖𝑛
CONTINUOSLY COMPOUNDING INTEREST −𝑖𝑛
𝑃 = 𝐹𝑒
EXAMPLES
1. If ₱5,000.00 shall accumulate for 10 years at 8% compounded
quarterly, find the compounded interest at the end of 10 years?
𝐹 =𝑃 1+𝑖 𝑛
𝑟 4𝑡
𝐹 =𝑃 1+ 𝐼 = ₱11,040.20 − ₱5,000.00
4 4 10
0.08 𝑰 = ₱𝟔, 𝟎𝟒𝟎. 𝟐𝟎
𝐹 = ₱5000 1 +
4
𝐹 = ₱11,040.20
𝐸𝑅 = 1 + 𝑖 𝑚 −1
2 𝑬𝑹 = 𝟐𝟔. 𝟓𝟔%
0.25
𝐸𝑅 = 1 + −1
2
EXAMPLES
3. Find the present worth of a future payment of ₱300,000.00 to be
made in 5 years with an interest rate of 8% per annum.
𝐹 =𝑃 1+𝑖 𝑛
₱300,000.00 𝑷 = ₱204,174.96
𝑃=
₱300,000.00 = 𝑃 1 + .08 5 1 + .08 5
𝑛 ln 2 = ln 1 + 0.05 𝑛
𝐹 =𝑃 1+𝑖
2𝑃 = 𝑃 1 + 0.05 𝑛
ln 2 = 𝑛 ln 1 + 0.05 𝒏 = 𝟏𝟒. 𝟐 𝒚𝒆𝒂𝒓𝒔 ≈ 𝟏𝟒 𝒚𝒆𝒂𝒓𝒔
2 = 1 + 0.05 𝑛 ln 2
𝑛=
ln 1 + 0.05
EXAMPLES
5. The amount of $45,000 was deposit in the bank earning an interest
of 7.6% per annum. Determine the total amount at the end of 6
years, if the principal and interest were not withdrawn during the
period?
𝐹 =𝑃 1+𝑖 𝑛
𝑭 = $69,837.09
𝐹 = $45,000 1 + 0.076 6